July 15 (Bloomberg) -- Bank of America Corp., the largest U.S. bank by assets, benefited from implied federal backing on about $118 billion of Merrill Lynch & Co. assets and owes the government compensation, the chairman of a House of Representatives committee studying the purchase of Merrill said.

“If you or anyone at Bank of America made a commitment, verbal or otherwise, to enter into this deal with the United States government, I urge you to honor that commitment,” Edolphus Towns, a New York Democrat, said in a letter yesterday to Chief Executive Officer Kenneth Lewis that was obtained by Bloomberg News. “It is the right thing to do.”

Regulators say Bank of America owes at least part of a $4 billion fee it agreed to pay in January because the company benefited from U.S. backing on Merrill assets such as mortgage- backed bonds, Bloomberg News reported on July 13, citing people familiar with the matter. The Charlotte, North Carolina-based bank says it owes the Treasury nothing because the plan was never put into effect, according to the people, who declined to be identified because the negotiations are confidential.

Lawmakers including California Democrat Brad Sherman are questioning whether taxpayers are being adequately rewarded for propping up lenders, and why Bank of America’s January acquisition of New York-based Merrill Lynch required a publicly funded bailout. The U.S. provided the bank $20 billion in capital plus the asset guarantees to keep Lewis from abandoning the takeover of Merrill Lynch.

The bank “is in discussions with Treasury” and had no other comment on Towns’s letter, spokesman Scott Silvestri said. Towns leads the House Oversight and Government Reform Committee.

Bank of America disclosed the guarantees Jan. 16, along with its first quarterly loss in 17 years. Its news release headlined the guarantee and called the program an “agreement.”

‘Ring Fencing’

“This announcement of this so-called ‘ring-fencing’ of Bank of America’s toxic assets provided financial stability to Bank of America at a very crucial time,” Towns said in his letter. He didn’t say how much the bank should pay, and asked Lewis for a response by tomorrow.

The plan called for the Federal Reserve, the Treasury, and Federal Deposit Insurance Corp. to participate in a loss-sharing agreement for loans, mortgage-backed securities and financial instruments that could last 10 years, according to company and Treasury documents. Most of the holdings came from Merrill Lynch, acquired Jan. 1.

The bank would pay a $4 billion fee in preferred stock and warrants, plus an annual fee of 20 basis points for undrawn amounts of the $118 billion, or $236 million, according to Treasury’s summary of terms, with more fees if the bank used the program. A basis point is 0.01 percentage point.

Never Completed

The agreement was never completed as the Treasury dealt with multiple financial crises and debated which assets would be included, according to the people. In May, Bank of America told investors it was “seeking to end negotiations” because credit markets had improved and the protection wasn’t needed anymore. Losses weren’t likely to reach the $10 billion trigger for federal participation, according to a May 7 statement.

Federal Reserve Chairman Ben S. Bernanke told the House Oversight Committee on June 25 the accord wasn’t “consummated.” Former Treasury Secretary Henry Paulson is scheduled to appear before the committee tomorrow.

Bank of America added 32 cents to $13.23 in New York Stock Exchange composite trading as of 10:30 a.m., leaving the shares down 6 percent this year.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: July 15, 2009 10:53 EDT